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Taxpayers Can Deduct Certain Local Lodging Expenses Under Proposed Rules

The
IRS issued proposed regulations on Tuesday that permit
employees to treat certain expenses paid or incurred for
local lodging as deductible business expenses (REG-137589-07).

Under Sec.
262(a), living expenses paid or incurred when not traveling
away from home are considered nondeductible personal
expenses. However, in certain circumstances, the proposed
regulations will allow local lodging expenses paid or
incurred in carrying on a taxpayer’s trade or business to be
deducted, depending on the facts and circumstances, one of
which is whether the expense is incurred to satisfy a bona
fide requirement imposed by the employer. Expenses that are
lavish or extravagant under the circumstances will not
qualify (Prop. Regs. Sec. 1.162-31(a)).

Prop. Regs.
Sec. 1.162-31(b) contains a safe harbor (and numerous
examples illustrating the safe harbor) allowing a deduction
for expenses for local lodging to attend business meetings
and conferences if:

The lodging is
necessary for the employee to participate fully in or be
available for a bona fide business meeting, conference,
training activity, or other business function.

The lodging does not exceed five calendar days and
does not occur more than once each calendar quarter.

The employer requires the employee to remain at the
activity or function overnight.

The lodging
is not extravagant or lavish and does not provide a
significant element of personal pleasure.

The proposed regulations specify that an employee’s costs
for local lodging are personal expenses unless the expenses
are deductible under Sec. 162 as ordinary and necessary
business expenses (Prop. Regs. Sec. 1.262-1(b)(5)). The
preamble to the regulations explains that being an employee
in itself can qualify as a trade or business.

Taxpayers do not have to wait for the proposed
regulations to be finalized to rely on them. Taxpayers may
apply the new rules to eligible local lodging expenses paid
or incurred in tax years for which the statute of limitation
on credit or refund has not expired (Prop. Regs. Secs.
1.162-31(d) and 1.262-1(b)(5)). This means that taxpayers
can file amended returns to seek refunds for tax paid on
these expenses for years that are still open (three years
from filing date/two years from payment of tax). A
simplified version of these rules was already in effect
under Notice 2007-47 (which is obsoleted by these
regulations).

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”

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